Art of Accounting: Stalemate between Parents and Children

[IMGCAP(1)]Many family run businesses have parents and children who perform excellently together, and I have worked with many proud companies. However, occasionally there is a stumbling block, in that a parent and child cannot just get it together. What to do?

In many small businesses an underperforming employee hurts, and oft times there is a reluctance to get rid of them. They linger on, holding back the company. It is inevitable that they will be gone at some point, but that point seems to be delayed past when it should have been dealt with. Biting the bullet is necessary, and when the owners realize they are better off in the long run, they take the necessary step.

However, let’s suppose the employee is a son or daughter. Then it isn’t so easy, and could cause a war within the family. As an advisor I’ve learned that providing honest advice is a death knell and will lead to eventually losing the client, and I am comfortable with that. I don’t like it, but I feel it is important to do my job the best way I can and that the client is paying me for my advice, guidance and opinions.

With children, I see four ways to proceed: 1) help the parent get rid of the child, 2) the child to get rid of the parent, 3) bring in a professional nonfamily manager, or 4) sell the business.

I will deal with #4 first. Selling replaces the cash flow stream the business provides with a fixed sum that will throw off substantially lower cash flow. If the family members rely on the business for their livings, then this is not a viable way to proceed. #3 is a realistic approach when it is clear that neither the parent nor child could manage the business effectively. This requires an agreement on the lack of management skills or desire and a joint cooperation to defer to a professional nonfamily person running the business. It works. The downside I’ve seen occurs when the manager who is brought in turns out not to be the right person and is let go. The search process then restarts. It needs perspicacity and resolve. In one client I’ve seen this work fantastically on the third try, so once the process starts, it needs to be followed through. In another case, the search process showed that one of the children was capable of handling the reins, and this also worked out great.

#1 and #2 are harder. One has to step aside voluntarily or be bullied out. Either could step aside but usually only the parent could be bullied out. Reality indicates that the child or children take over a great deal of the day-to-day work from the parent and become indispensable to the daily operations, even if they do not have the talent to manage the entire business, be a leader and take it to the next level. The parent can’t push out the child, and usually will not want to even if that is the right decision, since then the parents have to go back to doing the type of work they got rid of for themselves when their child took it over. The parents also risk a fight with each other since the one not fully involved in the business does not want their child pushed out. False starts are made trying to get the child the management and leadership training needed, but the child is too busy working. Also, stubbornness sets in when the child wants an undeserved anointment as the “boss,” even if they are not ready. This creates massive family friction and unpleasantness.

I’ve seen these situations quite a few times. It works itself out when the child is given a personal assistant to take over many of the nonoperational functions they get involved in and operational people are added to relieve the business of the dependence on the daily work of the child. Concurrently the child recognizes the need for management training and starts reading books and articles on the topic, listens to recorded programs, attends seminars and industry conferences where such speakers are scheduled, and joins a peer coaching group such as Vistage. This is usually done during a “cease fire” and can take a couple of years. With the right attitudes, slow progress is made and one day it dawns on everyone that the child has earned the respect to have the head position.

As much experience as I have, I still become involved with situations that are “new.” The dynamics of people continually evolve and today’s young’uns are different than yesterday’s. Also, many parents with energy do not like to admit they are slowing down or need to step aside to some extent. Our job is to gain trust, offer suggestions, and project the situation if nothing is done versus making some changes. It also requires reasonableness from all parties and a desire to move the business forward.

Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, published by www.CPATrendlines.com and “Managing Your Tax Season, Third Edition,” published by the AICPA. Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or emendlowitz@withum.com.

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